Reference no: EM133171294

Question - ABC manufactures a single product, which has the following standard revenue and cost data:

Selling Price $12.00 per unit

Materials 2 kg per unit at $3.00 per kg.

Labour $2 per unit

Direct expenses $1.50 per unit

Sales in December 2021 and January 2022 are forecasted to be 12,000 units in each month.

As a result of direct marketing expenditure of $54,000 in February 2022, sales are expected to grow by 20% in February 2022 and thereafter to increase by 1,200 units in each month from March 2022 to June 2022. Sales after June 2022 are expected to remain constant.

30% of sales are on cash terms and 70% of sales are expected to be collected in the month following the sale. Inventory of finished goods at the end of each month are required to meet 25% of the expected sales for the following month. Inventory of materials at the end of each month are required to be equal to 40% of the materials required for the following month's production.

Materials are paid for in the month following purchase. All other costs are paid for in the month in which they occur. Overheads for production and admin will be $13,200 per month, excluding $6,000 of depreciation per month.

Sunrise Inc. has a $600,000 bank loan at 5% interest per annum, on which it pays interest twice per year, in March and September. The cash balance at the end of December 2021 is expected to be $45,000. Sunrise Inc. has a policy of maintaining at least $30,000 in its bank balance at the end of each month.

Construct the following monthly budgets for Sunrise Inc. for the three months from January 2022 to March 2022:

(a) Production budget in units.

(b) Cash budget.

(c) Does the cash budget reveal any issue that Sunrise Inc. may face? Suggest two (2) possible ways for Sunrise Inc. to improve its cash flow.